China’s Importance to Multinationals Means They Must Approach It With Greater Nuance

By Edward Tse

2021-05-05

Originally published on Caixin Global on May 5, 2021.

Many multinational corporations (MNCs) have China at the top their minds these days. China has become an important, if not the most important, market for many MNCs.

Then there are those who are just entering China or have recently expanded their operations in China. These companies are trying to figure out ways to capture the upside of the China market. And of course, some who have been affected by geopolitical issues like Xinjiang cotton are pondering over what to do next.

China’s economy is not stagnant and continues to evolve. GDP grew 2.3% in 2020 despite the pandemic and was up an incredible 18.3% in the first quarter this year, indicating a strong recovery. GDP growth for the whole of 2021 is expected to be 6%. FDI inflows in 2020 at $163 billion was the highest in the world and external trade continues to be vibrant. Two-way trade with the U.S. shot up to $659.5 billion and that with the EU was $710 billion in 2020.

A recent study by the American Chamber of Commerce has shown that 70% of US companies are planning further investments in China, and according to the “Business Confidence Survey” released by the German Chamber of Commerce, 72% of respondents are planning further investments in China.

Despite the antagonism during the Trump era, China has continued to tread the reform path and expand market access to foreign companies.

One example is opening of the previously rather restricted financial services sector. BlackRock is to set up a wholly-owned asset management business in China and in January, PayPal became the first third-party payment platform with 100% foreign ownership in China.

Foreign automakers are no longer required to form joint ventures with local companies. Tesla has its Gigafactory in Shanghai and Volkswagen has raised its stake in its joint venture with local automaker JAC to 75%.

A major reform milestone was the Foreign Investment Law promulgated in March 2019 which puts foreign enterprises at par with domestic counterparts in many ways. Another landmark piece of reform was the Unreliable Entity List announced in September 2020 to protect legitimate rights and interests of all kinds of market entities. Besides, the National Negative List has pruned the number of restrictive measures by 17.5% compared to its 2019 version. These are clear signals of how China is trying to reduce barriers to foreign companies.

The new 14th Five-Year Plan stipulates that quality of development will be a top priority for China through 2025, making innovation and technological independence even more critical. Advanced manufacturing shall be used to fix issues in areas such as key components, materials, software, and fundamental systems while developing a more innovative and competitive value chain with a higher “value-added” content in priority areas. External and internal components are expected to complement each other.

In addition, Vision 2035 lays out social and economic development goals for the next 15 years, the target being to build a modernized economy by 2035. Continued promotion of urbanization and further strengthening of regional trade and investment partnerships with ASEAN, Belt and Road participants, as well as other economies are the other principal features.

China’s goal to achieve carbon neutrality by 2060 is massive, ambitious and challenging. It will require close collaboration with many stakeholders.

While a range of new business models have already emerged in China during the pandemic. The above major initiatives will inevitably create many more major opportunities across the board and for some, potential risks.

China is accelerating deregulation and its market is expanding. The right government policies and the growing ingenuity of local enterprises are together generating what’s possibly the world’s most competitive economy. The dynamics of competition and collaboration is highly intensive in China and is expected to stay intensive going forward.

As innovation continues to progress rapidly, the ability of foreign MNCs to participate in China’s innovation game is both an opportunity and a challenge. Opportunity — because innovation implies new sources of value creation. Challenge — because others too will innovate. MNCs who were earlier into copying products from home and pasting them in Chinese markets are now trying to tailor products for the Chinese customer. They are learning from China and are innovating in and for China.

It’s been a cliché to say that the great majority of foreign MNCs cannot ignore China. It is even truer these days because of China’s vital importance in MNCs’ global value chains as both a market and a supply base, besides a source of inspiration for knowledge and ideas.

Going forward, China’s major initiatives are providing more opportunities for businesses local and foreign. However, to capture the upside, MNCs need to approach China in a much more sophisticated manner, knowing where and how the risks will manifest and how they can be handled.

One source of risk is geopolitics which have seeped into all walks of life. The recent imbroglio about Xinjiang cotton suggests that MNCs need to understand that like many other markets, there are some “red lines” in the Chinese market too and these have to be carefully taken into account when making decisions. CEOs need to have greater clarity of thought for effective strategic decision-making.

Companies need to communicate with their target consumers in a manner aligned with the evolving consumer needs and technological changes. A digital mindset and approach can be very critical when determining the winners. Brand winners in China will increasingly be those that can tick as many of the relevant success factor boxes as possible, whilst not crossing the Chinese consumers’ red lines. It is a function of a (foreign) company’s understanding of and capabilities in the China context.

Geopolitics would impact how the future interplay between globalization and deglobalization would evolve and the role of China in this interplay. It will in turn impact issues such as global governance, technology, data sovereignty and local requirements. These issues and people’s needs embody implications for strategic plans for MNCs’ operations in China or for that matter their global strategies with China at the core.

MNCs need to develop different ways of capturing China’s upside while responding to different risks and they must always know where the red line is. The right strategic evaluation of plans and actions is mandatory for all multinational companies who aspire to stay relevant in the global ballgame. China offers MNCs lots of upside but approaching China will also require more sophistication.